Deregulation didn't zap CPS' reputation

San Antonio customers happy with electric utility.

Updated 2:56 pm, Sunday, January 6, 2013

CPS Energy boss Doyle Beneby gets $1 for every $7 to $9 pulled in by his private counterparts.

CPS Energy boss Doyle Beneby gets $1 for every $7 to $9 pulled in by his private counterparts.

Photo: EDWARD A. ORNELAS, SAN ANTONIO EXPRESS-NEWS

Deregulation didn't zap CPS' reputation

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A decade of electricity deregulation in Texas has driven up the pay of investor-owned utilities' chief executives, but it has not fulfilled promises to produce the nation's cheapest and most reliable power.

In fact, deregulation has had the unintended consequence of discouraging the building of new power plants, leaving the state's power supplies vulnerable as Texas continues to grow.

But the power companies in San Antonio and Austin have bucked the trend. As municipally owned utilities, CPS Energy and Austin Energy were not affected by deregulation.

CPS Energy, the largest municipally owned electric and natural gas utility in the country, ranks No. 1 among large utilities in the South for customer satisfaction and electric reliability, J.D. Power and Associates finds.

Nationally for the past two years, utility customers have told J.D. Power they are increasingly dissatisfied with electricity reliability, but CPS Energy has climbed each year in the rankings.

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In addition to its high approval ratings, CPS Energy has a surplus of power generation, is on track to save 770 megawatts of power (the equivalent of a large power plant), and is contracting to add an additional 400 megawatts in solar energy.

It also maintains some of the lowest energy rates in the country, with the lowest combined energy bills of the 10 largest cities in the country, according to CPS figures.

The average electricity rate of 9 cents per kilowatt-hour is below the national average of 12 cents.

The state has gone from having the best electric power reserves prior to deregulation 12 years ago to having the nation's worst, creating the peril of rolling blackouts during summer heat waves, according to a report by the North American Electric Reliability Corp.

When Texas deregulated, California was infamously afflicted by a power reserve problem. Texas seemed immune.

Today, the Texas grid operator and the utility commission are struggling to find ways to encourage the construction of new generating plants.

In Dallas, Energy Future Holdings spokesman Allan Koenig said his company has brought three new plants online since 2010, at a cost of $3.2 billion, but the decision to build them was made under different circumstances in the mid-2000s.

Texas has a “good problem,” he said, a strong economy making it one of the fastest-growing states in the nation. But it is “driving the need for new generation.”

Energy Future Holdings is an example of what deregulation wrought; a company with $7 billion a year in revenue, part from retail electricity sales and part from electricity generation. But it's also troubled.

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“Substantial indebtedness” threatens the solvency of the company, according to Energy Future's most recent filing with the Securities and Exchange Commission.

Yet John Young, the president and CEO of Energy Future Holdings, had his pay package more than double between 2010 and 2011, from $6.9 million to $15 million.

In Houston, CenterPoint Energy was criticized in 2008 after thousands of trees toppled into power lines during Hurricane Ike, causing the city's longest outage ever. Too many trees had been allowed near power lines, an investigation later concluded.

In 2009, a year later, CenterPoint CEO David McClanahan got a $1.4 million pay raise, elevating his pay package to $7.6 million, more than seven times what he made just nine years earlier.

According to documents on file with the Securities and Exchange Commission, McClanahan's 2009 raise was a reward for a good year of stockholder returns. Share price is the primary incentive in his pay package.

Other executives below McClanahan focus on the electricity side, he said. Their goals contain reliability incentives, but financial goals are much larger.

Spurred by the Hurricane Ike troubles, CenterPoint obtained a $200 million federal grant to install smart meters. It has upgraded tree trimming efforts and has future plans to create a more “intelligent grid” with computerized controls that will fix a break faster, records show.

“We do make reliability a focus,” LeBlanc said.

But records on file with the state utility commission show CenterPoint's reliability numbers degraded recently.

LeBlanc blamed it on transformers that failed during the heat waves of 2011. He acknowledged that transformers can be upgraded to withstand those stresses, though it is costly.

But the reason they are paid more these days is because, under deregulation, they're competing with each other for the bottom line, which is not the case for municipal utilities such as CPS Energy, he said.

In 2000, just after the Texas Legislature approved deregulation, the average CEO pay package was $2.7 million for the heads of major utilities operating in the state, according to an analysis done for Hearst Newspapers by Longnecker & Associates, a Houston executive compensation consulting firm.

A decade later, in 2011, the average pay package hit $7.5 million, a 175 percent increase. Longnecker's analysis showed the national increase was 150 percent.

Top executive pay packages at investor-owned utilities now are dramatically higher than at traditional municipal utilities in the state and elsewhere.

Last year, tea party activists and other critics raised a furor about the pay package and expenses of CPS Energy CEO Doyle Beneby. Yet at $820,000 a year, half of that in deferred bonuses, Beneby receives only a buck for every $7 to $9 made by his private counterparts, based on national and state averages.

Larry Weis, the general manager at Austin Energy, gets $345,000 a year.

His utility, operating outside of the deregulated system, has one of the four best reliability records in the state, according to statistics collected over the past seven years by the Public Utility Commission of Texas. And CPS Energy, about double the size of Austin Energy, ranks in the top 10 percent nationally for restoring power after an outage.

Overall, “deregulation was a bad idea,” said Tom “Smitty” Smith, director of the nonprofit Public Citizen's Texas office and an advocate for improved utility service in Texas since 1974.

Yet Smith cites benefits of deregulation, too. Texas is among the nation's leaders in the use of wind generation and in the installation of “smart meters,” which have gone into more than three-quarters of the Texas homes and businesses.

Promoted by the Legislature, those electricity control devices provide a first step toward reliability improvements.

“We feel the competitive market has been through some fits and starts. But as it has matured, it has provided advantage to consumers,” said John Fainter, president of the Association of Electric Companies of Texas.

The municipally owned utilities conduct some of the state's most innovative experiments to address power outages, said David Power, deputy director of Public Citizen.

CPS Energy has partnered with a high-tech firm to make it easier for customers, including residences, to control their thermostats and other energy demands remotely.

Derrick Howard, chairman of the CPS Energy board of trustees, said the biggest difference between running municipal- and investor-owned utilities is in the audience.

Investor-owned CEOs must answer to stockholders and customers, while the municipal nonprofit utility head answers primarily to customers through the political system.

The recent flap also demonstrates that “the scrutiny over pay is more significant” at a city-owned system than at the investor-owned utilities, Howard said.

Public Citizen's Smith said the traditional utilities such as CPS Energy are “the most aggressive” in the application of new technology.

They're governed locally, so they don't have to apply to the utility commission for permission to experiment, and they have the distribution and generation management under the same roof, making them more flexible, he said.

Beneby said long-term investments are easier when a company is free of short-term profit considerations.

He said no other utility in the state is as far along in the use of “home area networks,” which allow customers to remotely lower their thermostats and reduce other home power demands to save money and help the grid during times shortages.

Records show his CPS Energy recently improved reliability numbers. Other changes that improved reliability, Beneby said, were greater use of lightning arrestors and repairs made to corroding underground wires.

“If it were not imminently cost effective, we would not be doing it,” he said. “Trust me.”